[Note: A historical post. This was an article I wrote in 1998 on some of the early competition policy issues surrounding the then relatively new internet. It was republished in The Journal of World Intellectual Property, Volume 1, Issue 3, pages 571–582, May 1998]
Competing for the Internet
by Kevin Coates, DG IV- C-1,
published in the EC Competition Policy Newsletter, February 1998
Introduction
The Internet is not new: it has grown and developed over several decades. What has changed is the introduction of commerce to the Internet. Goods, services and information can be exchanged, bought and sold on the Internet; the provision of access to that marketplace has consequently become an increasingly commercial activity in its own right. As the importance of the Internet to commerce increases, so does the importance of the provision of access to the Internet.
The purpose of this article is to set out briefly some of the main issues which have arisen in relation to the application of the EC competition rules to the commercial activities surrounding access to the Internet. This does not mean that all of the issues set out above have been the subject of cases before the Commission: a number of issues have been the subject of informal discussions but may well prove to be the subject of formal cases in the future. This article does not address the implications for the competition rules of the impact of the Internet on commerce generally, though these issues are being considered by the Commission.
One area where the Commission has already considered these implications is in relation to the provision of voice telephony via the Internet. The Commission published a draft Notice in May 1997 for public comment. This has now been revised in light of these comments and the final version was adopted by the time of publication of this /DGIV/speech/eight/en/sp980xx.htm.
A large number of competition issues will revolve around the activities of companies located in the EU / EEA. However, the Internet has its origins in the United States, and the US is still today the main focus of Internet development. Given the global character of the Internet, activities of companies outside of the EU / EEA will nevertheless often have an impact on competition within the EU / EEA. The competition rules apply to such activities. (1)
Competition Issues
Although the Internet is in many areas extremely competitive, there are areas which have already proved to be of concern.
The increasing commercial importance of the Internet is encouraging market entry by strong players in closely related telecommunications and media markets. In addition, the rapidly increasing demand for capacity leads to a demand for ever higher capacity backbones, in turn leading inevitably to a greater involvement of established telecommunications operators and the global telecommunications alliances. Developments such as those related to the Domain Name System and, looking to the future, the likely increased importance of key management for encryption will also tend to encourage market entry by established operators.
It is the role of the competition rules to ensure that the success or failure of that market entry is based on the ability of the company to compete on that market, and not on the leveraging of a market position elsewhere. This is particularly important in the telecommunications sector in Europe where liberalisation has only recently taken place. Looking at possible developments such as the proposed changes to the Domain Name System, it is also important to ensure that established operators do not place themselves in the position of acting as regulators in their own market.
The Commission’s policy in this area has been clearly stated by Commissioner Van Miert:
“Dominant players cannot claim technological progress as a justification for extending their dominance. That would stifle innovation and not encourage it. So we will not allow gatekeepers to block entry into markets. This is true in the case of joint control of cable networks and telecoms infrastructure, of digital set top boxes and of Internet Web browsers.” (2)
The analysis below looks at three specific areas which the Commission expects to be important over the coming months: the domain name system, access issues – including backbone access, local access and user interface issues, and some particular points in relation to competing service provision.
Organisation of the Internet: the domain name system
Background
The domain name system (DNS) (3) maps human-friendly names onto the underlying Internet Protocol (IP) numbers of the Internet. The system is hierarchical, rather like a traditional postal address: thus “europa.eu.int” indicates that a second level domain has been created for the EU institutions within the Top Level Domain reserved for INTernational institutions. The EU institutions have created a server under that second level domain called EUROPA.
A distinction is usually drawn between generic Top Level Domains (gTLDs) , (4) with COM, NET and ORG being the most relevant for present purposes, and national Top Level Domains (nTLDs), based on the two letter country codes from ISO-3166. (5) Generally, gTLDs are intended to be used where the organisation using the domain operates in a number of different countries, nTLDs are intended to be used for organisations operating in one country. This guideline – it is not a rule – is often more honoured in the breach than in the observance, particularly in the US but also in other countries. Generally there appears to be a perception among some users that gTLDs have a greater value as an address than nTLDs.
This, combined with the rapid growth of the Internet, has led to a strain on the names available in the generic TLDs, particularly the COM domain.
A committee – the International Ad Hoc Committee – was established to discuss this problem and formulate proposals . (6) The background and conclusions of this committee can be found at http://www.iahc.org: this led to the establishment of the generic Top Level Domain Memorandum of Understanding (gTLD-MoU). (7) It is possible that this process will lead to a substantial reform of parts of the domain name system. In brief, the proposals envisage the creation of a structure of bodies to govern and manage the allocation of domain names, (8) together with proposals for the creation of new generic Top Level Domains (9) the allocation of second level domains within those new generic Top Level Domains, and a mechanism for the resolution of domain name disputes.
Competition implications
The proposals raise a large number of legal and political issues, going far beyond those of competition law, and which will not be addressed here. From the point of view of the competition rules, however, two main issues arise: those related to the acceptability of the proposals themselves from the point of view of the competition rules, and those related to the participation of dominant companies in the domain name allocation system. The latter is of particular concern under Community competition law given the substantial progress that has been made towards the introduction of effective competition into the telecommunications sector.
The proposals for reform
In relation to the first, any system for allocating domain names that will be used by companies operating in the EU / EEA is capable of affecting competition in the EU / EEA. Given the non-governmental status of the proposals for reform and its proponents, it would appear likely that any agreement by undertakings to reform the domain name system would constitute an agreement between undertakings within the meaning of Article 85(1). As such, the impact of any such system must be scrutinised under the competition rules.
Neither the gTLD-MoU nor any of its associated agreements has been notified to the Commission pursuant to Regulation 17, but the Commission’s services have had several discussions with relevant parties: these discussions are continuing. The competition concerns are broadly divisible into those relating to the establishment of the governance system for domain name allocation, both now and in the future, and those relating to the mechanisms for allocating domain names and the resolution of disputes.
The Commission must, in broad terms, be satisfied that the participants in any revised domain name system are a fair representation of interested parties, and that membership of all relevant bodies is based on objective, transparent and non-discriminatory criteria. This concern does not merely apply at the time of establishment of the domain name system, but will continue to apply for as long as the system is in operation.
Moving on from the need to ensure that participation in the system is fair, the Commission must also be satisfied that the operation of the system, in principle and in practice, is not anti-competitive. This point would then require an analysis of the status, rights and obligations of the Registrars, together with the safeguards contained in the system to prevent Registrars solely or jointly acting in an anti-competitive or exploitative manner.
Given the need to ensure a stable, coherent and interoperable system, it appears reasonable that a competitive system is not created at every level of the DNS. It is important, however, to ensure that competition exists to the maximum extent possible.
Artificial limits on Registrars, such as, for example, giving one Registrar allocation rights in respect of a particular gTLD, or limiting the number of Registrars without adequate justification, would appear difficult to justify under Article 85.
The participation of dominant companies
The participation of telecommu-nications operators who continue to hold a dominant position on their domestic telecommunications market(s) in domain name registration activities is of particular concern. Possible anti-competitive actions of dominant companies have been addressed in detail in various Commission documents (10).
One of the major concerns in relation to the allocation of domain names would be the regulatory nature of any such allocation activities. Given the importance of domain names to operations on the Internet, it would appear that any significant influence by a dominant company over the policy of domain name allocation would risk infringing the principle that a dominant operator should not act as a regulator in its own market (11).
One important issue is the participation of dominant telecommunications operators, acting as Registrars in the context of allocation of second level domains under the TLDs. Registrars should take steps – such as the separation of their Registration activities from their other activities – to ensure that they act on a fair, reasonable and non-discriminatory basis, and therefore that their dominant position is not abused.
Allocation policies for national TLDs are determined at the national level, and are not subject to scrutiny by a system such as that proposed in the gTLD-MoU. The Commission would therefore be substantially more concerned if dominant national telecommunications operators were involved in the policy, organisation and allocation of national TLDs.
Access issues
Backbone access
The Internet is a network of interconnected networks. In order to provide a full Internet service any operator will need access to all, or at least the vast majority, of the networks connected to the Internet. This can be achieved either by the operator entering into a number of peering (12) agreements, or by the operator entering into transit (13) agreements with one or more larger operators.
Market definition in this area is difficult: the distinction between competitors to whom an operator will provide reciprocal access to its customers, and customers to whom an operator will provide access to all other Internet users appears more fluid than is the case in traditional telecommunications, such as voice telephony.
In addition, determination of market share is also complicated: should market share be measured in terms of capacity, traffic carried, traffic exchanged, revenue, numbers of connected Internet Service Providers (ISPs) or hosts, importance of particular connected ISPs or hosts, or a combination of the above? It may be the case that no-one figure will provide a complete picture of the market position of the various operators.
Finally, in a rapidly growing Internet market, is there a possibility of market power, and if so, how should this be assessed?
Notwithstanding these difficulties of market definition and quantification, similar concerns in relation to the power of particular networks appear to arise as with traditional telephony and interconnection (14). These concerns include the risks that a dominant network operator: charges supra-competitive fees for network access; seeks to reinforce its position, for example, by concluding lengthy exclusive arrangements with its customers; or favours its own operations at the expense of third parties. (15) This latter point is discussed further below.
Given the increasing consolidation in the industry, the area of backbone access is one which the Commission will keep under close review.
Local access
In order for an operator to provide its residential and, probably, small-business customers with access to the Internet, it will often be reliant on the local loop to provide a connection between its customers and its equipment.
At present there are two main local loop access mechanisms – the traditional copper telecommu-nications network usually owned by a dominant telecommunications operator and, where an appropriate network exists, (TV) cable. Alternative mechanisms such as wireless or digital mobile are at present either insufficiently widespread or too expensive to be a viable alternative to the above mechanisms.
Looking to the future there is likely to be increased demand for broadband services, including broadband Internet access, delivered to the home. Given the available technology capable of delivering broadband interactive services, it is likely that the position of copper and cable will be reinforced in the local loop as the only affordable broadband alternatives in the medium term.
Given the commercial and technological constraints on providing competing local access mechanisms, it will be fundamentally important to ensure, first, that competition in the local loop develops and, secondly, that network operators of local loops are not at the same time the only service providers over those networks.
Cable Review
In addition to being the most important potential local infrastructure competitor for the provision of voice telephony services, cable networks are technically capable of providing substantially faster Internet access to domestic users. The Commission has therefore published a draft Article 90 Directive (16) dealing with the situation where a telecommu-nications operator also owns the cable network in a particular area, and proposing as a first step structural separation of the cable and copper operations. The Commission will consider taking further action on the basis of individual cases.
Unbundled Local Loops
In addition, the Commission is keeping under review the possibility of taking action against dominant telecommunications operators who refuse to provide unbundled access to their copper local loop. Unbundling entails the separate provision of access to the switch and to the copper wire: this allows alternative operators to use only the copper wire of the incumbent, to invest in their own switching equipment and thus bypass the switching infrastructure of the incumbent.
Bundling can in itself constitute an abuse under Article 86 EC (17): in addition, however, refusing to unbundle where such unbundling would allow competitors to invest in infrastructure which would upgrade the narrowband copper telecommunications network to broadband capability could, depending on the circumstances, constitute a separate abuse under Article 86(b) – that of limiting production, markets or technical development.
Ensuring that telecoms operators do not use their control over the telecommunications network to stifle development of broadband infrastructure and services will be extremely important over the coming months and years.
Discrimination
Discrimination on the part of dominant operators is commonly alleged in relation to local infrastructure. Discrimination could take the form of, in certain circumstances, refusal to supply access, or access on less favourable terms than those provided to your own downstream operating arm. This could manifest itself in the form of slow delivery times for infrastructure, slower fault repair, or generally lower quality of service. Such allegations will often raise difficult factual issues, but it will often be for the dominant operator to provide the documentary evidence needed to disprove the allegations, given that the operator will be the only entity with access to the information necessary to demonstrate the absence of discrimination
User Interface
Hardware
Given the relatively high cost of a PC, and therefore limited number of households which own a PC, operators are increasingly looking at alternatives which make use of the television as a ubiquitous and consumer-friendly display mecha-nism, and which therefore have the potential of allowing a mass market Internet service to be developed. In the US, WebTV, now owned by Microsoft, provides a set top box (STB) which allows users to access the Internet via their television sets. A number of operators in Europe intend to combine a set top box suitable for the provision of TV-based Internet access or other interactive services, with features which will allow the demodulation of digital broadcast signals (18).
Just as with control over the local loop access mechanisms, the Commission will wish to avoid any situation where control over access devices such as set top boxes is used as a lever to strengthen the market position of the access controller in service markets which use that box. The lever used could be any aspect of the set top box – be it the Application Programming Interface, the Electronic Programme Guide or the Conditional Access system.
Software
In addition to an access device, access software will generally be necessary to allow a user to interact with the Internet / online service. When with set top boxes, the access software will generally be an inherent part of the set top box and competition issues will generally not be separable from those relating to the STB itself.
However, when the traditional access mechanism (PC/modem) is used, the user will generally have a choice as to the access software (for the World Wide Web, the “browser”) that is used. Although Netscape’s Navigator originally had a commanding market share in the browser market, Microsoft has built up a presence rapidly in recent months with its Internet Explorer.
Browser software can be distributed in various ways. First, it can be made available for downloading from web sites, such as those of Microsoft or Netscape, of ISPs, or of third parties. Secondly, it can be provided as part of the set up package of an ISP through agreements with those ISPs. Thirdly, it can be pre-installed on new PCs through agreements with OEMs. Finally, it can be distributed through retail channels either in its own right or on magazine cover disks.
The Commission is currently examining a number of licences which Microsoft has concluded with large ISPs in the EU relating to the terms on which those ISPs will promote and distribute Microsoft Internet Explorer.
In addition, the US Department of Justice is presently taking court action against Microsoft alleging that some of Microsoft’s agreements with OEMs in the US violate the 1995 consent decree (19). The Consent Decree, which is substantially identical to the Microsoft 1994 Undertaking to the Commission, prohibits Microsoft from: “entering into any operating system license agreement that is expressly or impliedly conditioned upon the licensing of any … other product” (Section IV(E)(i)) – i.e. from bundling other products with its desktop operating systems.
Section IV(E)(i) goes on to state that: “this provision… shall not be construed to prohibit Microsoft from developing integrated products.”
Microsoft argues that the combination of Windows 95 and Internet Explorer that it was licensing to OEMs was such an integrated product.
The competition rules do not prevent technological progress, rather they have as one of their objects the promotion of technological progress. The competition rules do not therefore prevent improvements to existing products or services. However, as Commissioner Van Miert has made clear, the Commission will seek to prevent gatekeepers from using their influence to extend into other areas. Building on previous decisions, the Commission will be particularly careful to ensure that actions by dominant companies do not constitute unlawful bundling (20) and / or do not amount to a refusal to supply necessary interface information (21).
Competing service provision
Control over access to facilities is not the only means whereby a dominant operator may infringe the competition rules in entering Internet-related markets.
With the growth already seen in the residential Internet service provider market, a number of incumbent telecommunications operators have sought to enter the retail ISP market, with varying degrees of success. The Commission has received a number of formal and informal complaints against particular telecommunications operators: although the detail of the particular cases is as yet confidential, two main themes emerge. First, companies are concerned about access to facilities and the pricing of that access: this is addressed above.
Secondly, companies are concerned about the relationship between the Internet service provider subsidiary and the parent telecommunications operator: concerns in particular revolve around cross-subsidisation, predation and more favourable treatment for an operator’s own operations. The 1991 Telecommunications Guidelines indicate that where a telecommuni-cations operator is active in more than one area:
“Proper allocation of costs is more easily ensured in cases of structural separation, i.e. creating distinct entities for running each of these two categories of activities” (22)
In the absence of such separation, it will often be extremely difficult for an operator to demonstrate that it has allocated its costs in an appropriate manner and is therefore not cross-subsidising its Internet activities or predating.
As with other activities of dominant telecommunications operators, an operator’s internet operation must be run as a commercial activity in itself, with a view to making a profit. Subsidising internet activities from more profitable areas of operations, allowing the internet operations to trade below cost, would be likely to constitute predation. Similarly, accepting losses on internet operations because of purported increased profits elsewhere also risks being characterised as abusive.
As regards discrimination, it is clearly established as a matter of Community law that a dominant operator cannot discriminate as between its own operating arms and third parties where such discrimination has an effect on competition (23). Possible examples of discriminatory conduct are mentioned above.
Horizontal online alliances
DG IV has already seen a number of mergers involving Internet-based content, which did not raise any competition concerns (24).
Given the rapid development and continued restructuring of the Internet, it is likely that horizontal alliances related to the Internet will often raise substantial co-operative and spillover effects. In addition, it may be important in the future to look closely at whether limited horizontal alliances are genuinely full function operations. Although some areas of Internet content are certainly independently viable, where we are analysing a limited horizontal alliance, it is likely that there will often be significant reliance on parent companies. For these reasons, Article 85 issues are likely to become increasingly important in the future when analysing Internet related cases.
Conclusion
The Internet is fundamentally important to the development of the Information Society. Notwithstanding the extremely positive effects which the Internet will have on commerce and competition, risks of anti-competitive behaviour on the Internet are already apparent and could become dramatic as major market actors from the information technology, telecommunications and media fields move increasingly into the growing internet market. This gives rise to a substantial potential for abuse of market positions or conclusion of anti-competitive agreements in the global arena, which, in turn, will require a clear analysis of the effects of actions in respect of global markets on competition within the EU/EEA.
Commissioner Van Miert has indicated his determination to ensure that the competition rules are used to their fullest potential in ensuring the continued development of the Internet and the maintenance of the Internet as an open and competitive commercial environment.
(1) Ahlstrom and Others v Commission of the European Communities (Wood Pulp) [1988] ECR 5193
(2) “The deadline of 1st January 1998: What does it mean for consumers of telecommunications services?” Commissioner Van Miert, speech to BEUC, Brussels, 21/11/1997. Available at:
http://europa.eu.int/dg04/speech/seven/en/sp97063.htm
(3) A more detailed description of the domain name system and the hierarchies can be found in “Domain Name System Structure and Delegation”, RFC 1591, March 1994, by J. Postel, available (viewed 5 January 1998) at:
ftp://ftp.isi.edu/in-notes/rfc1591.txt
(4) These are COM for commercial undertakings, NET for undertakings with Internet specific activities, ORG for non-commercial undertakings, EDU for (mostly) US educational establishments, GOV for US Government, MIL for US Military, and INT for international organisations.
(5) For example, US for the United States, DE for Germany, BE for Belgium. UK for the United Kingdom is an exception.
(6) There has been some criticism that the IAHC and its successor the gTLD-MoU have no authority to determine changes to the governance of the Internet. This does not in itself appear to be something which concerns the competition rules: if the proposals lead to changes in the domain name allocation system, and therefore affect the availability and allocation of domain names, it is those effects which will be scrutinised.
(7) For further information see the generic Top Level Domain Memorandum of Understanding (gTLD-MoU) at:
http://www.gtld-mou.org/gTLD-MoU.html and the Council of Registrars Memorandum of Understanding at:
http://www.gtld-mou.org/docs/core-mou.htm
(8) The Policy Oversight Committee “will be established to conduct oversight of CORE and CORE-gTLDs and to set policies for CORE and its Registrars” (gTLD-MoU Section 6)
“The role of the Policy Advisory Body is to make recommendations to the Policy Oversight Committee… regarding general policy matters relating to gTLDs and the DNS and to advise the Policy Oversight Committee with respect to amendments to this MoU and the CORE-MoU.” (gTLD-MoU Section 5)
The Council of Registrars is, “An operational organization composed of recognized Registrars for managing allocations under gTLDs… CORE shall establish and enforce requirements that each Registrar operate in all respects consistently with the provisions of this MoU, the CORE-MoU and decisions of the Policy Oversight Committee… Each CORE-gTLD Registrar may assign second level domains (SLDs) in any gTLD, described or created under the provisions of this MoU and the CORE-MoU, on a fair-use, first-come, first-served basis.” (gTLD-MoU Section 7)
Administrative Domain Name Challenge Panels will be established to resolve domain name disputes. Their decisions will be binding on Registrars, but are without prejudice to the rights of any national or regional courts. ((gTLD-MoU Section 8)
(9) Firm, Shop, Web, Arts, Rec, Info and Nom
(10) See, inter alia, Commission Guidelines on the application of EEC competition rules in the teelcommunications sector, OJ C 233, page 2, 6 September 1991 and the Commission’s Draft Notice on the Application of the Competition Rules to Access Agreements in the Telecommunications Sector. A final version of this document will be published shortly. A copy of the draft is available at:
http://europa.eu.int/dg04/lawliber/en/com649en.pdf
(11) See, inter alia, Case 13/77, GB-Inno-BM/ATAB, 1977 ECR 2115, and the requirement in the telecommunications liberalisation directives relating to the objective, non-discriminatory, proportionate and transpa-rent allocation of telephone numbers – see Recital 11 and Article 4 of Commission Directive 96/19/EC of 13 March 1996 amending Directive 90/388/EEC with regard to the implementation of full competition in telecommunications markets.
(12) Whereby customers of operator A can reach customers of operator B, and vice versa.
(13) Whereby customers of operator A can reach customers of operator C via operator B.
(14) Similar concerns may also arise in relation to the network or clustering effects of particular types or packages of content, for example with online services. These effects have already been seen in traditional broadcasting industries.
(15) These concerns are set out in detail in the Commission’s Draft Notice on the Application of the Competition Rules to Access Agreements in the Telecommunications Sector, mentioned above.
(16) This can be found at:
http://europa.eu.int/dg04/lawliber/en/cabrev1.htm
(17) See, inter alia, Judgment of the Court of Justice: (Fifth Chamber) of 14 November 1996, Tetra Pak International SA v Commission of the European Communities, Case C-333/94 P, ECR [1996] I-5951
(18) See, for example, British Interactive Broadcasting, the proposed joint venture between BT, BSkyB, Midland and Matsushita in the UK.
(19) See the US Department of Justice web site for further details (http://www.usdoj.gov) The Department of Justice petition is at:
http://www.usdoj.gov/atr/cases3/micros2/1236.htm
(20) See the Tetra Pak judgment, footnote 18 above.
(21) See the IBM Undertaking, Bull EC, 10-1984, point 3.4.1, and, more generally the draft Notice on the application of the competition rules to access agreements in the telecommunications sector, above.
(22) See footnote 11 above, at paragraph 106.
(23) See the draft Access Notice, at paragraph 93.
(24) See Commission Press Release IP/97/799 of 18 September 1997: “Commission authorises the creation of the joint venture HOS LIFELINE by BERTELSMANN and BURDA”.